Europe

European Economics Weekly

Energy, semi-conductors and Italy’s Green Pass

The continued high level of energy prices strengthens our view that euro-zone inflation will keep rising in the coming months. But by lowering consumers’ purchasing power, it could actually reduce inflationary pressure in the medium term. Meanwhile, data released this week added to the evidence that supply problems are weighing on German car manufacturers, and things are unlikely to get better any time soon. Finally, Italy’s new Green Pass requirement for workers came into force today, sparking protests at a number of ports. But so far the disruption seems to have been limited.

15 October 2021

European Data Response

Euro-zone Industrial Production (Aug)

The large decline in euro-zone industrial production in August was largely due to supply shortages affecting production, particularly in the German auto sector. While demand is still strong, prolonged supply shortages and high input prices suggest manufacturing will continue to struggle in Q4.

13 October 2021

European Economics Update

“Underlying inflation” still weak

Core inflation in the euro-zone rose to 1.9% in September, its highest level in nearly 13 years, but other measures of underlying inflation are much lower. This supports our view that when the temporary forces pushing up inflation have faded, the core rate will settle well below the ECB’s target.

12 October 2021

Key Forecasts

Main Economic & Market Forecasts

%q/q(%y/y) unless stated

Latest

Q2 2021

Q3 2021

Q4 2021

Q1 2022

2020

2021

2022

2023

GDP

+2.2(+14.3)

+2.2(+14.3)

+2.3(+3.9)

+1.4(+5.7)

+0.9(+6.9)

-6.5

+5.4

+4.5

+1.5

Household Spending

+3.7(+12.6)

+3.7(+12.6)

+3.8(+2.1)

+2.0(+7.5)

+1.2(+11.1)

-8.0

+3.9

+6.8

+1.9

HICP (%y/y)

+3.4 (Sep)

+1.8

+2.8

+3.9

+2.7

+0.3

+2.5

+2.0

+1.0

Unemployment Rate (%)

7.5 (Aug)

8.0

7.5

7.3

7.1

7.9

7.8

7.0

6.8

Depo Rate, end period (%)

-0.50

-0.50

-0.50

-0.50

-0.50

-0.50

-0.50

-0.50

-0.50

10yr Bund Yield, end period (%)

-0.17

-0.20

-0.20

-0.25

-0.20

-0.57

-0.10

0.00

+0.25

$/euro, end period

1.16

1.16

1.15

1.15

1.15

1.22

1.15

1.15

1.20

£/euro, end period

0.85

0.85

0.85

0.85

0.85

0.89

0.85

0.85

0.86

Sources: Bloomberg, Capital Economics


Energy, semi-conductors and Italy’s Green Pass

European Economics Weekly

17 October 2021

Our view

The economic recovery is naturally slowing as GDP gets back towards its pre-pandemic level, but persistent supply shortages and rising energy prices are also taking their toll on activity. GDP will still record another very strong quarter of growth in Q3. However, the weakness that is increasingly evident in industry, especially in Germany’s auto sector, will weigh on overall euro-zone economic growth over the coming months. Meanwhile, soaring energy prices mean headline inflation is likely to rise to over 4% in the coming months, even once government measures to mitigate the impact are taken into account, and then fall back more slowly next year. But we still expect inflation to end 2022 well below the ECB’s 2% target, partly because wage growth will remain subdued. The ECB is likely to end its emergency asset purchase programme next March but step up purchases under its Asset Purchase Programme instead. So while we expect bond yields to drift up over the coming years, they will remain very low.

Latest Outlook

European Economic Outlook

Strong rebound and temporary rise in inflation

The euro-zone is on the way to an almost full recovery. We expect Germany to regain its pre-pandemic level of activity later this year and the tourist-dependent southern countries to do so next year. The Delta variant may lead to some voluntary social distancing or self-isolating and perhaps limited restrictions over the winter, but we doubt that it will derail the recovery. Inflation will rise further than most expect in the coming months due to rising input costs and supply bottlenecks. But with wage agreements and inflation expectations remaining low, it will drop back and stay lower than most expect over the medium term. The ECB is likely to step up its standard Asset Purchase Programme substantially when its emergency purchases end next March and leave its deposit rate at -0.5% until beyond 2025, which is much later than investors expect.

16 July 2021